Envestnet in Play as Assets Soar?

(Bloomberg) -- Envestnet, a maker of cloud- based software used by financial advisors, has increased its value fivefold since going public. Buyers may take notice.

The $1.46 billion company serves advisers at Fidelity Investments, Fifth Third Bancorp and other banks and broker- dealers that use its technology to keep track of more than $500 billion of investments. Its expanding clientele could appeal to a competitor such as SEI Investments Co. or financial data vendors such as FactSet Research Systems Inc. or Fiserv Inc., said Barrington Research Associates Inc.

Companies are turning to Web-based applications, or software-as-a-service, to reduce the need for servers and other hardware on their premises. Thats part of Envestnets appeal, Oberweis Asset Management Inc. said. Envestnet is aiming to boost revenue 20% a year for the foreseeable future, and analysts see sales climbing at almost double the average pace of software peers, according to data compiled by Bloomberg.

Software-as-a-service is one of the hottest areas for acquisitions right now, David Covas, a Lisle, Illinois-based money manager at Oberweis, said in a phone interview. Oberweis owns Envestnet stock among the $1.5 billion of assets the firm oversees. Envestnet is one of the premier players in the space and one of the only ones with a cloud-based offering. Their growth has been fantastic.

CLOUD DEMAND

Last year marked the biggest buying spree for Web-based software makers since 2007, with about $16 billion of deals, data compiled by Bloomberg show.

Judson Bergman, a former managing director of mutual funds at Nuveen Investments Inc., founded Envestnet 15 years ago. Since the company first sold shares in July 2010 for $9 apiece, the price has swelled to more than $40, while the companys market value has soared from about $270 million.

Over that time, revenue more than doubled to $243 million, a majority of which came from fees based on assets under management.

Today, Envestnet shares fell 0.9% to $42.60 at 10:03 a.m. New York time.

Envestnet serves both independent investment advisors as well as large institutions such as Fidelity, which is the companys single largest customer, accounting for 20% of sales. Other users include Bank of Montreal, Robert W. Baird & Co. and Sterne Agee Group Inc., according to a company presentation this month.

OPEN ACCESS

Envestnets software provides advisors with access to more financial custodians, such as Charles Schwab Corp. and TD Ameritrade Holding Corp., than its competitors, the company said in a filing. Thats a plus for advisors who tend to work with more than one custodian, according to Jeff Houston, a managing director and analyst at Barrington Research in Chicago.

Just the sheer number of relationships that it has with financial advisors is really attractive to a lot of different companies, Houston said in a phone interview. Its independence -- how it sits in between all the different custodians -- is attractive as well.

Dana Taormina, a spokeswoman for Envestnet who works at public-relations firm JCPR, declined to comment on whether the company has been approached by suitors.

SEI Investments would be a logical acquirer, Houston said. The $5.8 billion company provides asset-management technology and competes with Envestnet.

Im sure its on their radar screen, he said.

DATA PROVIDERS

FactSet, which has a market value of $4.6 billion, and $14 billion Fiserv are among the financial data providers that also could be interested in buying Envestnet to expand into software for financial advisors, according to Houston. FactSets customers currently include fund managers, analysts and bankers, while Fiservs payment and processing systems are used by banks, investment management firms and retailers.

Bloomberg LP, the parent company of Bloomberg News, competes with companies such as FactSet.

A buyer would get a company thats projected to boost revenue 66% to $403 million over the next two years, according to analysts estimates compiled by Bloomberg. That compares with an average growth rate of 37% for U.S. software companies that are valued at more than $1 billion, data compiled by Bloomberg show.

Getting hold of Envestnets growth wont come cheap. Its price-sales ratio reached a record 6.6 in January, versus a multiple of about 3.7 for software stocks in the Standard & Poors 500 Index, the data show.

As Envestnet continues to grow and meet its goals, management and shareholders may demand a high price to agree to a sale, said Covas of Oberweis.

When companies have so much growth in front of them, theyre not as excited to sell out, he said.

Culture is pivotal because it plays a key role in determining how firms make decisions to achieve their business objectives. Culture is at the heart of competitive advantage today; this is particularly the case for investment firms where people and their judgments are the chief assets. A firm’s culture creates the context and incentive structure to support an investment process based on a longer time horizon, a collaborative team approach that can integrate diverse insights and robust risk management. Culture also underpins business decisions, including talent management, strategy and capacity management. A strong culture in investment management firms is a requirement for sustainable alpha-generation.